US Senate Considering Carried Interest Proposal

April 14, 2010 Taxation in USA

_MG_0429Sources within the US State Senate have confirmed that new legislation is being considered which could effectively double the tax liability on profits earned by hedge-fund and private-equity managers.

On April 13th Senator Charles Schumer, member of the US Senate Finance Committee and serving New York Democrat, revealed that a proposal to instate “Carried Interest” legislation was “on the table” before the Finance Committee. Under current laws, the cut of profits taken by private-equity fund executives is treated as capital gains, and taxed at 15 percent. If passed, the Carried Interest proposal will re-classify these earnings as ordinary incomes to be levied at 35 percent, effectively more than doubling the current tax liability.

The US House of Representatives has previously approved three separate Carried Interest bills, with the most recent being in December 2009. The first two bills have already been rejected by the US Senate, while the third is yet to be voted upon. If passed by the Senate, the Carried Interest proposal is expected to raise an additional USD 24.6 billion for the federal government over the next ten years.

The proposal already holds the support of US President Barack Obama, who has accounted for its Senate approval and subsequent revenues in his 2011 Budget Plan. Adding his support for the proposal, Warren Buffet, Chairman of Berkshire Hathaway, said, “If you believe in taxing people who earn income on their occupation, I think you should tax people on carried interest.” Despite the backing of the US House of Representatives, prominent industry figures and the US President, some political and economic analysts believe that the Carried Interest proposal will once again be voted out of the Senate. According to the Center of Responsive Politics, a Washington-based group monitoring political donations and giving, private-equity firms across the US have already donated in excess of USD 5.7 billion towards 2010 congressional elections to ensure that the bill will not be passed.

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